Deficit endangers dollar

A KEY factor in the present funk in share markets on both sides of the Atlantic is the retreat of the dollar. Now, with the latest American trade figures, we have some insight into why the US currency is under pressure against the pound and the euro.

In April alone, the US trade deficit widened to $36bn (£24bn) and the current account deficit in the first quarter reached a record $112bn (£75bn), sharply up from earlier estimates. The reason for the soaring current account deficit is the sharp appreciation of the dollar over the last seven years, which has pricked American competitiveness.

Goldman Sachs in New York estimates that the dollar is overvalued by about 14% against the currencies of the major US trading partners, which means it still has some way to fall. It expects the current deficit to swell to $500bn (£333bn) by year-end, at which point it will represent 5% of American national wealth - a record.

Up to now, investors around the world have been willing to fund this huge shortfall by buying American shares and bonds. But doubts over the validity of US corporate accounting, and the enormity of the scale of financing, have started to cut off the flow.

The main beneficiary is the euro, which is now worth more than 96 US cents and has climbed 4% against the last month. Sterling has now climbed to its highest level against the greenback in 17 months. Helped by a CBI survey showing a manufacturing upturn, it is now trading at just a whisker under $1.50.

What is surprising is the speed of the dollar's fall. The exploding US current deficit is, after all, no secret and the IMF, among others, has warned for years that, when the markets recognise its significance, it could have a destabilising effect on capital markets. The snowball effect of hedge funds and investment banks betting against the dollar has speeded the process.

Not long ago, experts were forecasting parity for the euro and the dollar by year-end. The alienation from Wall Street and the herd instinct on the currency markets suggest that parity could arrive a great deal sooner.

As for Britain, the present realignment on the foreign exchanges, which has lowered sterling's value by 7% against major currencies over the last couple of years, will make it that much easier for Tony Blair to press ahead with a euro referendum. The hidden test of exchange rate compatibility is still some way from being met. But, with every set of trade numbers from the US, it comes closer.

Tragic endgame

MARCONI has given way in the headlines to the woes of NTL, Telewest and Energis. But one should never lose sight of the fact that the ruination of Marconi, under the stewardship of Lord Simpson and John Mayo, represents the most serious British casualty of the technology meltdown.

Just how bad the company's finances really were, when Mayo was still worrying about his share options, is now apparent. At its peak, the former GEC was worth £35bn. Last night, with the shares at 5p, its market value was £140m.

There can have been few more wanton acts of destruction of shareholder value and manufacturing jobs in the nation's history. Shareholders will be asked to make the ultimate sacrifice, as banks and bondholders grab the equity in exchange for paying down the company's debt burden in what will be a massive dilution.

But this is, in effect, the only way of ensuring that as many of the remaining 33,000 jobs can be preserved and Britain at least has a lingering stake in the telecoms equipment industry.

For Marconi's biggest personal shareholder and emeritus chairman, Lord Weinstock, it is a desperately tragic end to his life's work.

Silent enemy

NORTHERN Foods reports that, at the end of the year to March 2002, it had a deficit of £47m in its pension fund. If this had been directly applied to its results, a profit of £70m would have been reduced to £23m. This is as clear a demonstration as any of the current pressure that the pensions crisis is imposing on Britain's companies.

Moreover, it is not going to get any better. New three-year actuarial reviews, being done for large companies, are showing up alarming shortfalls as the 28% drop in the main market indices cascade through the pension funds, turning surpluses into massive deficits.

This is a silent enemy that will put huge pressure on finance directors and pension funds trustees, many of whom are ill-equipped for the task.